"It is typically characterised by strong, compelling, logic. I loosely use the term 'pyramid selling' to describe the activities of the City but you explain in crystal clear terms why this is so." commented Dr Vincent Cable MP to the author.

When, over 4 years ago, the author of this blog wrote in his submission to the House of Commons Treasury Committee that the financial industry became a criminal enterprise in legal sense of this phrase, many considered it as an outlandish and eccentric statement, rather than the outcome of a professional analysis on the merits. It appears that the authorities - and then mainstream media - albeit slowly, start catching up with the reality. Why so late? It is very trivial indeed and has been more than obvious all along. However a more important question is when we start seeing prosecutions. How many years is it going to take? There is no point of even considering the current proposal of prosecuting for "reckless management" in the future until and unless the crimes of the past are not resolved. Basically first things first: the government should set the priorities right.

Friday, 28 June 2013

On the 19th June 2013, the Governor of the BoE, Sir Mervyn King in his Mansion House speech confirmed that the bankers must have been prosecuted under the exiting law and regulations. He said that the "firms that pose a risk to taxpayers [i.e. the financial institutions], cannot be prosecuted because of their systemic importance" (sic) and are "too big to fail, too big to jail" (sic) (at 18:38 of the Bloomberg recording). I.e. he clearly implied - and from the Governor of the BoE it is as direct statement as it can conceivably be made - that the bankers would have normally been prosecuted under the existing laws, but the structural arrangements which defy the spirit and the letter of the existing law seemingly preclude this. And this cannot be accepted: such reasons are clearly against the public interest and undermine the public trust in the justice system. Is it the case that there are small people that can be easily prosecuted and there are those who can conspicuously break the law, make themselves fabulously rich, bankrupt the country, turn lives of millions into complete misery and do all that with impunity accepted by the government? This appeared to be a message of Sir Mervyn about the government handling of the financial mess.

The founding article of this blog, "The largest heist in history", proposed over four years ago:

Therefore is the government going to move forward and start prosecuting those who caused the current financial mess? Legally there is no problem to do so: creating financial pyramids is a very serious crime. Bankers committed very serious crimes, which - from technical standpoint - were very trivial (and it is even more trivial to prove this). This has been discussed on this blog since early 2009. Or maybe Sir Mervyn was talking nonsense?

It would be helpful if the government made a public statement on Sir Mervyn's comments. They were definitely not lighthearted jokes.

When the author of this blog started talking about the prosecution of those who caused the current crisis more than four years ago it was considered by the mainstream as eccentric and not worth an attention. Now the "Old Lady of Threadneedle Street" sings the same tune. Or one might try to generalise and say that, sadly, there is nothing ridiculous that can be said now about the current state of world affairs that after sometime turns up to be glaringly obvious.

It is also encouraging that the mainstream starts slowly catching up with something that has been glaringly obvious for more than four years ago. Although the mainstream media journalists have still a long way to go: but they will eventually get there kicking and screaming. They are also as part of the financial mess story as bankers and politicians, not just reporting on it.

Friday, 21 June 2013

I can only recommend "This week" on BBC 1. The beginning of the programme is about the banking industry behaviour. Nothing new, in fact a very old news, but it is nice to note that the mainstream is catching up with things that have been glaringly obvious for over four years and have been discussed in detail on this blog for years. Still the mainstream has a long way to go and a lot to understand.

Why so late? What is so difficult about this crisis that it takes so many years for the mainstream commentators to understand? This seems to be a more challenging subject to study (psychology, media studies, study of transparency and corruption, etc.) than studying the causes of the current financial mess, as the latter have been obvious and clear all along. The mainstream media handling of the financial mess since 2008 is a very interesting story and a research subject in itself.

Indeed after many years the mainstream media starts "discovering" glaringly obvious issues directly related to the current financial crisis. It is very worrying that it is so late. It may be argued that one of the reasons why we are in this mess for so long with no light at the end of the tunnel is because it takes mainstream media, decision and policy makers and politicians many years to understand obvious but critical causes behind the current crisis. It is a different but even more worrying matter that they do not appear to act appropriately in response to their findings.

However it is even more serious point, and more worrying, that no one of the taking part in the Newsnight discussion appeared to understand, in clear forensic terms, the difference between reckless risk taking and what the calculated risk is that businesses - including financial ones - have to take. And without that no serious banking reform is possible as the financiers will be calling reckless and indeed criminal risk taking as a necessary and reasonable business risk. This issue, from financial industry perspective, had been discussed in "Loans to deposit ratio and banks liquidity".

Sunday, 31 March 2013

It may be a bit self indulging to write all the time "I told you so. I told you so many years ago". But what's the choice? The continued economic downturn in the UK is not surprising at all. At present the economy is managed which ensures that dire straights will continue. So no one should be surprised: simply await more bad news to come. The politicians' rhetoric about growth, prosperity, etc. can only be met with an ironic smirk. It looks they treat people if they were silly and would not see the obvious. Some even mainstream pundits have been arguing (privately) whether it is correct to treat the politicians as either devious or stupid. Or maybe there is a third choice? Whatever the answer is it does not change the real situation.

Readers of "The largest heist in history" would remember that the financial mess which resulted from the collapse of a giant global pyramid scheme was engineered in order to funnel the money out the economies to private individuals. Governments bail outs, financial stimuli, generating massive public debt, quantitative easing, and so on - all in direct contravention with free market principles, common sense and indeed many existing laws (unlawful subsidies to the industry, anti-competitive behaviour, etc) - are reaching the end of their practical capacity. Every financial pyramid has its limit. Now, after investments, endowments, pensions have been plundered, the time came for private savings and deposits. What happened in Cyprus was not a mess or a misjudgement. Cyprus, being a small island, is a test case. Firstly it is a tiny economy so any unpredicted overreaction can be contained. Secondly it is an island so things cannot spread physically easily.

Telling people that they can lose their deposits, even possibly below guaranteed amount (100,000 euros), which later was retracted, had not been a mistake. Firstly people realised and got used to the idea that such thing was no longer unthinkable. Secondly, by hitting deposits above 100,000 euros with up to 40% (or even maybe up to 60%) tax, it was made clear that such hit can be very hard indeed. Not some 6.75% or 9.9% as originally mooted: so now it is matter for the 'financial markets' to extend their target, below 100,000 euros. It is indeed a very primitive piece of social engineering and coaching people for the forthcoming loss. It is preparing psychologically all countries in Europe for the next step of the largest heist in history: direct and hard targeting of people's deposits.

There is also a rather ironic twist in the events in Cyprus. It has been widely reported that many billions of euros held in banks in Cyprus came from all sorts of dodgy businesses (Russia?). There is even a whispering subliminal propaganda designed to make it easier to accept this new phase of the largest heist in history. The message is that there is nothing wrong in stealing money from the thieves. Technically what happened there was that the billions of euros in cash deposited in Cyprus was used to redeem for a lot of toxic waste of the financial institutions (it is called 'making investments' in a financial language, with depositors cash). So, as expected, those who had cash ended up with nothing and those who held (and are still generating) zillions of toxic waste, got another tranche of their heist. The largest heist in history continues.

If it is true, as it is widely rumoured, that many billions of euros of mafia money have been kept in Cyprus and now something like 40% or even 60% are going to be lost, one could wonder whether European politicians, central bankers, who drive this process, e.g. finance ministers, or some other decision makers, even lower down the chain, are going to sleep comfortably. Or are they going to think more about their own and their families safety? Is mafia going to accept such multibillion euros loss? Or would they plan to teach a lesson in order to get their money back, to get a compensation for the current 'inconvenience' and mess and to make sure such a thing is unthinkable in the future. Mafia starts wars when there is big money at stake. And in Cyprus some powerful groups lost billions of euros. Therefore we can also look forward to listen to some interesting news. Don't be surprised. Despite being a mere speculation. This is as predictable - and even possibly engineered on purpose - as the current financial mess.

Sunday, 10 March 2013

For some years articles (and comments) on this blog warned that unless the current financial mess is solved (which was not that difficult) there was a real risk that the situation would develop into a war. For example in the article dated 23 December 2011, "Democracy on the ropes":

The mainstream politicians are eventually catching up with glaringly obvious realities some 2 - 3 years too late.

The risk of war in Europe is quite real. And it will not just happen, As the economies were robbed and ruined - not just for now: for generations ahead - social unrests seem inevitable. They could be directed against those who caused the current economic mess. So why not direct them as a conflict between the nations, so people start killing each other under very noble slogans of patriotism and all that rather than those who stitched them up in this mess? This idea seems to be a no brainer. And like the current financial mess it will be quite easy to engineer. And it is also quite predictable.

In 1929 a Polish poet Julian Tuwim wrote a poem: "To the simple man". It is worth reading again.

Tuesday, 5 March 2013

In today's Channel 4 News Mr Brooks Newmark MP discussed the EU proposal to cap the bankers bonuses to twice their salaries with a Swedish MEP Mr Olle Schmidt. Mr Schmidt argument for such a move was predominantly based on the public outrage about the bankers who engineered the current financial mess and are still handsomely rewarded for causing such disaster. Mr Newmark argued against limiting the bankers' bonuses as it would make the industry leave Europe (and the UK in particular). Instead he suggested that there should be an analysis of banks' balance sheets in the context of the credit risk.

Clearly, as Mr Schmidt admitted, his argument was political. Mr Newmark argument was professional, getting into the crux of the current financial situation. It appears that he was also right but most likely - as the context and the tone suggested - not in a way he actually intended.

PS. I am not writing frequently on my blog anymore as it is really a closed theme. Nothing new is happening. (Almost) whatever is happening in the economy now was commented on my blog in the past. So why repeat it?

Incidentally it would be interesting if the politicians, especially those in the government,published information how their financial situation changed since 2010 (the general election), or actually since the end of 2008 when the economic mess - which was an easily predicted result of actions of the financial industry - became omnipresent in the UK. If their personal financial situation improved - unlike the financial situation of the country - this would show that the politician have been acting in a conflict of interest situation as they have a personal vested interest in worsening the economy. As the UK economy deteriorates, they are becoming better off. Is it not great? The same applies to all the commentators but they are not elected and they do not wield a direct power.. (At very best they would not have a vested interest in not worsening the economic situation of the UK.)

We should not ignore that. Apart from statistically insignificant exceptions, people act for their own and their families benefit. And there is nothing wrong with this provided they do not act in a conflict of interest situation. And this is precisely the same lethal problem as a moral hazard. "no skin in the game", which clearly was one of the reasons that drove the financial industry to a behaviour that caused the current crisis. We should have been wiser by now.

Wednesday, 31 October 2012

Today we could see a debate in the House of Commons about how much money the UK should pay to the EU budget. When the government decided to pay many hundreds of billions (if not trillions by now) of pounds in form of subsidies to private individuals, i.e. to the banks, to "rescue" them in form of bailouts, in form of quantitative easing or in form of massive implicit insurance policy from collapse (as the government still accepts that the banks exist in a form of being "too big to fail"), interestingly, there was no such debate in the parliament prior to the decision. Well this really epitomises what the modern democracy is all about.

It appears that the Leader of the Opposition starts putting his finger on the problems with the banks. He seems to start understanding how damaging the financial industry in the current form is to the economy. However Mr Miliband still does not have a scooby. Investment banking practices, and the massive risks they pose to retail banking, are not the underlying cause of the current economic woes. It is actually a result. How to fix the banking system and what to do to bring the economy back on track was described well over two years ago, in June 2010, in "Prime Minister, sort out this mess, please". The Leader of HM Government Opposition is well advised to read it. If he understands it he will find that the separation of retail from investment banking is one of the five steps and is actually auxiliary (but recommended).

The underlying behavioural causes, rather than technical were described in "The largest heist in history", behind the current financial mess are the facts that a) the industry is uncompetitive consisting of "too big to fail" institutions and that b) the key decision makers are not exposed to the risks of their own decisions (so called "moral hazard"). This turned the modern capitalism system into its caricature, a kind of "communism for the rich" system with the financial industry living on massive state subsidies (e.g. implicit guarantees, quantitative easing) as a powerful oligopoly.

It is really disappointing and worrying that those who run UK plc, and those who aspire to run it, do not understand such bare basics. Or maybe it is within their roles not to understand them? The mainstream media commentators, apart from rare exceptions, are not any different.

So if you ever wondered where the quantitative easing money went and we do not see any improvement of the economy, but rather the opposite, the price of this property and the steep price rise of prime properties in London (50% since 2009) should give some clues. And in the meantime the Bank of England balance sheets keep growing full of toxic waste.

Wednesday, 22 August 2012

In the wake of the completely predictable - but for some reason considered by the mainstream media and politicians as "unexpected" - news that the UK government's tax receipts dipped last July, BBC Newsnight held a discussion between Jon Moulton and Jonathan Portes moderated by Gavin Esler proceeded by analytical material. Whilst Jon Molton was advocating further cuts in public spending to revive the economy, Jonathan Portes argued for more spending at the moment (and possible spending cuts later once the economy picks up). At one point Mr Molton concluded that the UK government did not have any other choice: either cut or increase public spending. Messrs Portes and Esler implicitly agreed.

The discussion on BBC Newsnight showed, again, the nature of the current economic crisis. It showed that those who comment on it or deal with it are completely out of their depth. They are simply confused: Mr Moulton's alternative - cut or increase public spending - is a vacuous argument.

The government's Funding for Lending initiative is initially expected to lend about £80bn at below-market rates to banks and building societies. Is it going to help the economy? Of course, not. Even if the banks lend the initial £80bn to households and companies this money will come back to the banks in the first cycle of the money circulation and will not be re-lent again (or very little of it). It will then be used by the banks to convert their toxic waste to it and, of course, to pay huge bonuses to those who will do it. It is glaringly obvious that the financial system works in a way that any cash injection done through the banks will eventually be plundered by them. Funding for Lending is another classic example of throwing good money after bad after rescuing the banks and QE. The financial system is below-rock bottom.

The disturbing news is that it appears that those who run the economy, the government and their advisors, and also the mainstream media who comment on it, do not have a clue about what they are doing. As the alternative news is even worse and rather improbable: that they are damaging the economy on purpose. But from logical perspective such option cannot be ruled out either.

Saturday, 4 August 2012

In 2002 Guantanamo Camp was set up as a camp for "illegal combatants", international terror suspects. Like any government's initiative it started a life of its own: jobs and income depend on it including those of most influential companies. For example Halliburton, a US company whose CEO was once Dick Cheney, the US Vice-president at the time when Guantanamo Camp was established, was awarded a $1 billion construction contract to revamp the Camp in 2005.

After a decade there are no longer "illegal combatants" roaming the world, waging the war against the US. There is a little operational case - to justify the expense - for Guantanamo Camp as a place for detention of international terror suspects. So what next for Guantanamo Camp? Is such a lucrative place of income for many influential defence businesses going to be closed? Or is it more likely that a large US company will get a lucrative contract for another revamp or even for running its operations?

Here the LIBOR scandal may come quite handy. Whilst we may be cynical about the capitalism in the US, especially in its current form of the "communism for the rich", the US has an impressive track record in prosecuting the financial fraudsters. From Charles Ponzi in the beginning of the 20th century to more recent perpetrators of the financial wrongdoings behind WorldCom, Enron, Tyco and "NatWest three" scandals. Not that long ago Bernie Madoff experienced the decisive side of the US justice.

It appears it is only a matter of time when the US justice system will start catching up with those behind the LIBOR scandal. In a recent interview on the BBC Radio, Prof Alan Riley from City University Law School said:

As the number of individuals involved in the LIBOR scandal is significant the Guantanamo Camp may become handy. The prospect of extraditions to the US is not purely theoretical. Indeed a number of City folk are already taking legal advice on that. And those who do not - who were involved in the LIBOR "business" - should think about it.

Tuesday, 31 July 2012

We may have thought in the last four years that the financial industry reached rock-bottom. But in the last couple of months we clearly heard knocking from below and it looks the financial industry will fall even further.

First a well-known for years industry practice of LIBOR interest rate rigging was found its way to the mainstream media as if it was something out of ordinary. This is the logic of the financial industry, especially in the City, and it is inconceivable - at least to the author of this article but everyone has to make his/her own mind - that The Economist did not know it when they were publishing "Save the City" article.

Then there were comments and explanations from Barclays Bank which - for some reason - was singled out in the LIBOR scandal. Price or financial rate rigging of any sort is wrong in any circumstances under free market principles. It is dishonest. The only kind of rigging which is the exception from this rule is by regulation. But regulation is not an ad-hoc decision of a banker, politician or bureaucrat but an effect of a transparent democratic process safeguarded by the clearly defined regulations. It is hard to believe that those who were involved in or knew about LIBOR rigging did not understand such basics.

We also heard news about HSBC involvement in drug money-laundering and mis-selling of complex financial products. It provided more examples that the financial industry has degenerated into a primitive fraud machine based on deceit. Before the end of 2008 each of this news would have been a massive scandal. These days we all seem to accept that this is how the financial industry works.

The mainstream media do not even dare to discuss the underlying cause of the current financial mess, the real engine of the fraud machine, which is bringing the western economy down. It is worthwhile to look into it again and how it works.

Cautious conclusions, based on other fraud investigations, indicate that a bunch of quite (not that) clever financiers changed the banking system practice from "fractional reserve banking" (i.e. lending with loan to deposit ratio below 100%) to, what the author of this blog called, "depleting reserves banking" (i.e. lending with loan to deposit ratio above 100%, which technically and legally is a pyramid scheme).

"Depleting reserves banking" rather than accumulating cash reserves at every deposit – loan cycle, depletes them. To cover this up a lot of instruments and methodology were invented (so-called "financial innovations") giving an illusion that whilst banks' reserves were rid of cash they somehow still had the reserves to cover for cash liabilities. This has nothing to do with whether cash is a paper or electronic record, but who is the guarantor of liability. Cash is guaranteed by a state. This is the key to understand this crisis: whilst capital reserves appeared to have been sufficient at the start of this crisis they collapsed in value as there was no sufficient cash on the market and only a state intervention prevented the financial system from a melt down.

"Depleting reserves banking" practice, peddled by fraudsters, need an army of incompetent "professionals" to run it. Incompetent to such a degree that they did not understand that this was a crude pyramid scheme that was bound to collapse. Hence a huge bunch of history, anthropology, other social sciences and, importantly, lawyers were employed as banks executives to execute heist designed that way. Typically these people's career in banking was very often based on hang-ups. A huge majority of them were very poor in maths in school and banking environment gave them a sense of massive self-importance. They became "masters of the universe" whilst many of their friends who were so much better in science at school were left behind in pretty poorly paid and mundane engineering jobs.

This mechanism was very important to the heist organisers. It created a mindless and incompetent army of financiers, like child soldiers in Africa. It also built a massive lobbying army protecting heist organisers from criminal consequences. This mindless lobbying army was also strengthened by the senior politicians who were given City jobs after the retirement. It is rather impossible to lock up thousands of influential thieves, most of whom did not even understand they were stealing. A lot of them still believe they were"creating value". Psychologically it is like prosecuting child soldiers in Africa. However this time we deal with the adults who should have known not to do jobs they were not suited for. Like a butcher should know that he cannot operate on humans: even taking appendix out which is a trivial surgical operation.

Is it then surprising that the UK economy is suffering from recession again, so-called a double-dip? Most politicians and mainstream media commentators appear to be surprised. This "double-dip" is a simple and easily predictable result of the way the economy is managed. Its is actually quite surprising that the recession is not even deeper. Are politicians playing stupid or are they really THAT stupid?

Friday, 29 June 2012

What we see now in the UK is a huge bare-knuckle fistfight in the family, i.e. the establishment that is running the country.

First the banks went bust in 2008, had to be rescued and became the wipping boy of the public: public enemy number one. So to counteract this, the expenses scandal sprung up out of nowhere. These things - that the politicians were on the take - have been know for years. But conveniently for the banks the scandal erupted and moved the role of the whipping boy onto the politicians. It seemed to work but the politicians had just enough of it and, conveniently for the politicians, the hacking scandal erupted. (The practice of hacking by the media had been very well known for years: from the primitive sifting through the rubbish of celebrities to most technologically advanced spying technologies). The resulting public inquiry into the practices of the media hit the entire media. So these guys had just enough of it. Hence now, when the Leveson Inquiry is getting into its final lap, conveniently for the media folk, new scandals around the banks have erupted this week. We turned the full circle.

Clearly it is a mafia-style bare-knuckle fistfight in the family. There is a war within the British establishment. It is interesting to watch where it will all end. Thus far we have to sponsor this pathetic and extremely expensive spectacle with our taxes.

Well Sir Mervyn, please speak for yourself and not for "most people". To remind you the analysis that was written at the end of 2008 and has been known by the House of Commons Treasury Committee since April 2009:

It is well documented on this blog that the actions taken by the governments at the time, in 2007, 2008 and 2009, were designed - which was glaringly obvious at the time too - to turn the liquidity crunch and banks' failures into a perpetual "crisis" spreading it into currencies and the sovereign debt. And the governments, together with the financial industry and the mainstream media, do all their best to keep it that way.

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The Bank of England, backed by the UK government, is going to pump yet another £100 – £120 billion into the economy. Regardless of a seemingly noble plan- to help squeezed businesses and ordinary people- this is yet another example of throwing a massive volume of good money after bad.

And as before, all this money will end up in the banks coffers redeemed for toxic waste (which from practical perspective is infinite) and then transferred to the super rich. It is astounding that the politicians do not see that their behaviour satisfies Einstein’s definition of insanity: “doing the same thing over and over again and expecting different results”. Is it not rather obvious that:

- that money is no longer a credible carrier of value (long term), hence economic theories and assumptions (whether Keynesian more spend or neo-liberal austerity approaches) do not hold anymore and can no longer be applied in practice?

- that any bailout is only a temporary reprieve and the problem comes back soon with a multiplied force (if the politicians are too silly to understand why this is so they have had over three years to learn it from the reality, experience)?

What can be done then? The situation is very similar to a state of the financial system after a war or a massive disaster. The easiest way is to suspend old money (pound sterling, euro or dollar) and issue a new currency (new euro, new pound, new dollar). First paying for the most basic social needs: food and subsistence necessities, social security, health, education, defence and law and order. (There is more than enough slack in the economy to fund it. We do not have a shortage of any goods or of skilled people to provide services.) Only then you can start negotiating the remainder of liabilities in the financial system: (deposits, pensions, and so on) what you are going to honour 100%, what you are going to honour partly and what you will write off completely.

And, not a small matter, the financial system has to be reformed so it no longer functions like a pyramid scheme as it does at the moment. Again, nothing new or ground breaking: e.g. returning to banking rules and principles of the 1970′s and 1980′s in Germany would do for a starter.

However Europe would require a separate reform as apart from debt problems there are structural problems that the debt crisis exacerbated and brought to light. At present politicians completely mix up these two separate things. It suits the financial industry as it helps them getting money into the financial system, by bailouts and quantitative easing. And this is what they are after: like the heavy industries here were after the government subsidies in the 1970′s.

If it is not done by the deliberate political decision through negotiations, such or a very similar solution will be forced upon the world by the events. The later it happens, the worse, as the mountain of notional debt and liabilities keeps growing. Hence it will be more and more difficult to deal with that in an orderly fashion (i.e. notional losses will be bigger hence, even a greater room for conflict).

At the moment any bailout increases the overall liability and ends up on the financial markets which are a failure, which do not function according to free market rules. This is a textbook example of throwing good money after bad (with no end till a disaster). Is the above not really basic? This is not a financial crisis. This is an intellectual crisis, a demise. It is a stupidity galore.

But there is a method in this madness, there is a reason behind this insanity. Every time we read about obliterated pension schemes and generally falling income and purchasing power of the middle and working classes, the workhorse of the economy, and the growing gap between them and the super rich, thriving market of top end properties in London, luxury goods and services, from systemic perspective it is simply a wealth transfer.

More importantly it is yet another clearly pathetic example of centrally planned economy akin to East European communist countries of 1970's and 1980's when they were on their last legs: governments looking for solutions of economic and financial problems by printing more and more money. This is communism at its "best" where apparatchiks (i.e. the financiers and their cronies) benefit: communism for the rich that is.

Just relax and keep enjoying this pathetic spectacle. You are paying with your taxes for this burlesque choreographed by intellectually retarded politicians and directed by the thieving and smartassish financiers.

Is it convincing? What happens to money that is repaid as debt? If the banking system worked properly debt repaid would end up in the banks' vaults. It would be re-lent as banks do not sit on liquidity. Sitting on liquidity generates no income for them: it is a loss. Repaying public debt does not necessarily reduce overall debt but shifts the debt from the state to private investors who would turn it into viable economic activity. Keynesian approach stimulates the economy largely through consumer spending. Public spending cuts and debt repayment stimulate the economy through private investment. Typically the way out of any recession was through using a combination of both.

However at present banks are famously not lending. The system of money circulation slowed down enormously. This is the key to understand the cause of the current economic depression that politicians, mainstream analysts and policy makers and mainstream media completely fail to grasp. Starting with Keynesian approach, there is a validity in the arguments presented by Prof Krugman. When investors are not confident during downturns, they tend not to borrow and invest. This, in turn, slows down the economy. If the state steps in and spends money it jump starts the economy.

There is an assumption behind this process that Prof Krugman did not mention and it is never mentioned by those who advocate Keynesian approach (e.g. Ed Balls). This assumption is that in the background of the economy there is a healthy banking system that performs money circulation and multiplication function through fractional reserve banking. For example, if the state borrows and spends £10 billion, the money ends up in circulation through the banking system. Normally banks re-lend it and, depending on a loan to deposit ratio, this £10 billion is multiplied up to £60 - 80 or even £100 billion. Then the state has to collect back through taxes this initial £10 billion with some interest, to repay the original debt, but the rest stays in the economy.

Keynesian approach it is not a magic and has its dangers. Ultimately, if the state borrows and spends so much that economy cannot absorb it in a productive way, i.e. above the capacity to collect in taxes that should be at least as much as the costs of borrowed money, this results in inflation growth.

Prof Krugman was wrong: Keynesian approach would not work in the current situation because the money spent would simply be sunk into banks and would do nothing to stimulate the economy. It would be another tranche of good taxpayers money thrown after bad. What is the way out then? It involves three steps:

Firstly sorting out the banks by explicitly stopping them practicing depleting reserve banking, i.e. perpetuating at exponential pace the existing and contingent liquidity hole. Incidentally depleting reserve banking is highly illegal at present as it is a classic case of a pyramid scheme. However this is completely ignored by the financial industry and we are seeing the effects of this the last 4 years. Thus far the politicians, mainstream analysts, policy-makers and media pundits staunchly defend what is - from technical and legal perspective - a criminal practice that brought upon the western economies the current crisis and keeps them in this, making things worse.

Secondly this should be accompanied by a systemic reform whereby all those in banking take a direct personal risk (civil and criminal liability) for their actions, banks should be deregulated and made compete in such a way that there would be no bank anywhere close to "too big to fail" situation. Simply reintroducing free markets into the financial industry with particular focus on eliminating moral hazard. Prosecuting under criminal law (for setting up and operating a pyramid scheme) all those who caused the current crisis and confiscating their (and their families') wealth would also act as an effective deterrent to the new "captains" of the financial industry. All of them would then think hard before they come up with any "financial innovation" (or as it was in the case of the current crisis a good old and crude pyramid scheme, incompetently disguised as a toolbox of financial innovations).

Thirdly debt reduction in order to reduce the money multiplier to a healthy level, between six to eight. This can be done through printing money, basically by inflation, or through debt restructuring, i.e. defaults. This is not a hard thing to do: the hard part will be to decide who should be losers and to what extent. But this problem, directly or implicitly, is inevitable so we may be better off resolving it in an orderly manner rather than through crude manoeuvrings like around the Greek debt which is simply a question whether the Greek taxpayer have to lose by being squeezed or the banks that lent to Greece (with full knowledge that Greece would not be able to repay the money in any event).

Only then will we have a luxury to discuss Prof Krugman proposal of stimulating the economy in a Keynesian way, through public spending. Or maybe it would be better if it is done through public spending cuts? If the banking system is healthy both will lead to economic growth. The former through consumer spending that will filter to investment, the latter through investment that will filter to consumers' pockets. And as ever, typically, it will be a proper balance that works.

COMMENT: I do not hold a strong position how good (or bad) fractional reserve banking is in general. If practiced with loan to deposit ratio of 50% it looks very safe and stable. If practiced with loan to deposit ratio of 99% it is extremely risky and most likely the system would collapse. So it all depends how fractional reserve banking is managed. However depleting reserve banking is a pyramid, is always unsafe and indeed illegal.

Sunday, 13 May 2012

Last Thursday, during BBC Question Time, Mary Beard, a professor of classics at Cambridge University told the politicians, Caroline Spelman (Conservative), Lord Oakeshott (Liberal Democrat) and Chris Bryant (Labour), and Peter Oborne, a prominent journalist and political commentator, as she commented on their discussion how to resolve the current financial and economic rather unacceptable situation:

Professor Beard, as an academic, is a very credible judge to tell when people have a clue what they talk about and when they do not. This is a good part of her general academic experience of assessing students and fellow academics. And she was precisely right: whenever most politicians and mainstream journalists start talking or writing about the ongoing financial and economic situation they are clearly out of their depth. It is only this part of human psychology that keeps us sane that does not allow them to comprehend how they are seen from the outside. Professor Beard told them just this: that the king was naked.

However behind the politicians and mainstream commentators who do not have a clue about the causes and mechanics of the current financial and economic situation, there are people who understand it well and, actually, engineered this "crisis". They take full advantage of it. They oil the wheels of the system giving politicians well-paid jobs in the City they are not professionally suited for and "The largest heist in history"continues.

The cardinal clearly doesn't get it. The current government is on a mission to build a "big society": bunch of volunteers providing key services and food banks instead of benefits and services guaranteed by the state, i.e. taxpayers, ourselves.

We are all in it together and ultimately we will all be equal: broke. Our, the taxpayers, main role has changed in the last 3 years from paying for services provided to us by the state to subsidising the financial services industry. If we take away the issue of super-rich who are getting richer as the super-rich have always been and always will be, this is the largest equalisation project in history: taking the middle classes to the cleaners. Even Karl Marx and his followers had not dreamt of such radical and progressive system: big society all in it together.

For over a decade, the "captains" of the finance industry with the blessing or possibly the collusion, of the politicians and regulators have engineered a massive global pyramid scheme, the largest heist in history. It is the largest-ever transfer of the wealth generated and accumulated by the middle classes to the super-rich. Every spending cut, increase in taxes, every negative differential of interest rates, i.e. when saving rates are below the inflation, the negative differential between wage inflation and price inflation, additional money printed (so-called Quantitative Easing), significant drop in house prices, amounts to a massive raid on wages, savings, pensions, endowments and generally the wealth accumulated for lifetimes and sometimes through the generations by the middle classes. This heist, this massive misappropriation, continues. We also clearly see the other side of wealth accumulation: the global market for premium properties and luxury goods is thriving and there is no sign of the financial crisis in offshore financial centres.

Obviously the politicians keep saying that they are fighting the crisis and want to bring back stability and prosperity. We have been hearing this since 2008. Maybe some of them, those that are not particularly smart, even believe what they are saying. But this is just a front so that the system, which is extremely efficient in transferring middle class wealth to the super-rich, is allowed to continue operating at full speed. The so-called "financial markets", which are grotesque and primitive parodies of the concept of the free market, keep ruining the economy and the lives of ordinary people. And despite the rhetoric of the politicians and many in the main stream media which supports their claims to be fighting the crisis, this is effectively just a smokescreen behind which the real agenda is hidden, that of cleaning out the middle classes. Both the media and the politicians ensure that the largest heist in history continues and are fully aware of what is going on.

Sunday, 22 April 2012

The computational complexity analysis of credit creation presented on this blog is an analysis of the dynamics of the reserves generated in the credit creation process. There are four disjoint and complete (taken together) classes that capture the dynamics of the reserves: full reserve banking, fractional reserve banking, no reserve banking and depleting reserve banking. Briefly, lending with loan to deposit ratio of 0% results in full reserve banking, lending with loan to deposit ratio of more than 0% and less than 100% results in fractional reserves banking, lending with loan to deposit ratio equal 100% results in no reserves banking and lending with loan to deposit ratio of greater than 100% results in depleting reserves banking.
The Austrian School of Economics gives the static analysis of the reserves: if a ratio of reserves to deposits is 100% it is full reserve banking, otherwise it is fractional reserve banking.

The relationship between static and dynamic analyses

A static full reserve banking is a result of dynamic full reserve banking credit creation process. A static fractional reserve banking is a result of the dynamics of either fractional reserve banking or no reserve banking or depleting reserve banking. Therefore the static analysis is less fine-grained. Importantly static analysis of reserves by Austrian School of Economics completely misses the pyramid creation aspect of the credit creation process when loan to deposit ratio is greater than 100% (i.e. it is only the case of depleting reserve banking).

This note was prompted by a number of comments from academic economists who considered the reserves analysis on this blog isomorphic to Austrian School of Economics'. Hence they missed the key point of distinguishing a static aspect of reserves from their dynamics.

Mr Brummer's book shows even more sinister side of the financial industry: how parasitical it has become in the last 30 years and how dysfunctional and damaging it is for the British economy.

As Mr Brummer explains:

"What tipped the balance towards foreign takeovers in the late Nineties and 2000s were three key factors: the cheap cost of borrowing; liberal takeover rules; and the presence of global investment banks in the City, with ready access to the world’s capital.

Throughout the boom years, these banks were allowed to write their own rules. What this meant, in essence, was that a bank which might once have considered it risky to lend ten times its share capital would now lend up to four times that amount.

The result? Foreign companies took full advantage of all this cheap and easy credit to snap up increasing numbers of great British brands.

Not only that, but our eccentric tax system actually made it more profitable for overseas owners to buy companies with borrowed money. For example, foreign firms who buy British companies using borrowed money are able to deduct the interest they have to pay on those loans from their tax bills.

And this had a direct effect on jobs in the UK. Weighed down with often massive debts, new owners were far less likely to invest in the future of the firm and were instead more likely to close down factories and plants, throwing thousands of Britons out of work.

(...)

In the real world, away from the gilded environs of the City, the tragedy is that tens of thousands of jobs have gone. Crucial skills have been lost — probably for good. And the strategic heart of British manufacturing has been ripped out, which affects our ability to climb out of recession.

Still, the outlook isn’t all bleak: bankers and foreign shareholders are doing just fine."

Mr Brummer's book should be dedicated to the British government, the London mayor, Mr Boris Johnson, and The Economist team and its Editor, Mr John Micklethwait, and all City supporters. Maybe they will realise, at long last, that it is not a matter of academic arguments or having different views. Their views are not only irrational but also are highly damaging to the interest of the country.

Monday, 19 March 2012

In the last few months of 2008, during the outbreak of the global financial crisis, three Icelandic banks Glitnir, Landesbanki and Kaupthing - like the rest of the global financial system - became insolvent and only avoided going bust instantly when Iceland, as a country, took over responsibility for their obligations.However soon afterwards Icelandic government decided that it could not afford to honour the debt and defaulted, and the the banks went bust anyway. This was despite having taken $2.1 billion loan from IMF. It was an example of Scandinavian common sense (which, as they say, "is not that common"): if you cannot afford to honour your debt, call it a day, go bust and start again.

Since a number of outside creditors lost their money, especially in the UK (a case of Icesave) and the Netherlands, Iceland came under pressure to take austerity measures and keep paying through their nose. Iceland is a country of less than 320,000 so these were massive obligations (around $3.5 billion to the British and Dutch governments alone through savers guarantees). In two rounds of demands, the Icelandic government agreed with the support of vote in the parliament, Althing. However the President Mr Olafur Ragnar Grimsson took a different view, refused to sign the bill and called a referendum. The Icelanders voted decisively for going bankrupt: 98.10%, i.e. not to pay the debt.

Subsequently the Iceland's Prime Minister at the time of the financial crisis break out, Mr Geir Haarde was put on trial on the charges the he had not taken adequate measures to protect the country's economy.

The Iceland's default was the beginning of its quite speedy recovery despite the fact that the western world was in economic crisis. Their currency was devalued by 70% making the economy more competitive. According to IMF Iceland's Gross Domestic Product, having recovered from a massive fall in 2009 of 6.9% and in 2010 of 3.5%, increased be 2.5% in 2011 and such steady pace of growth is expected to continue in 2012. In February 2012 Fitch upgraded Iceland's debt to "investment grade", from BB+ to BBB-. In comparison Fitch rates Greece at B-, six levels below Iceland (and this is after the recent Greece debt upgrade by 4 levels).

In February this year Iceland paid the first tranche of its debt repayment to IMF of $106.6 million and, spectacularly, bought back $443.4 million its bonds with the maturity in 2013 from IMF. Therefore Iceland paid around a quarter of its debt to IMF and ahead of time.

This is in stark contrast to Greece's way of handling the crisis. When Prime Minister Georgios Papandreou called for a national referendum on accepting the EU austerity measures or going bust last autumn, he was deposed and a new Prime Minister, Lucas Papademos, who was responsible for putting Greece in a financial mess in the first place was installed.

Greeks should take note: social unrest and taking on more debt to pay for old is not a way to recovery. As the democracy birthplace they should have more faith in it. As Iceland's example shows the route to recovery from the financial disaster is first default, then putting the political, economic and financial matters in order (and this may involve prosecuting some politicians and financiers who caused the mess in the first instance) and then gradual (and affordable) repayments. Is it a common sense after all?

Sunday, 26 February 2012

For all those who missed the table compiled by Patterson Associates and published in the paper edition of The Evening Standard on 22 February 2012, here it is:

Value added to the company per £1 in chief executive pay, 2006 - 2010:

SAB Miller:

£21,950

Reckitt Benckiser:

£11,958

Diageo:

£9,199

Rolls-Royce:

£5,182

Tesco:

£1,028

BAE Systems:

-£558

Legal & General:

-£3,495

Barclays Bank:

-£10,787

Royal Bank of Scotland:

-£34,275

Source: Patterson Associates

The table shows the relationship between the notion of "the top City talent" and the skills and abilities to make/lose money for the investors/shareholders. No wonder pension funds, saving rates, endowments' returns are what they are. Any surprise?

For all those who follow "the City top talents" views on the current financial crisis and their depth of understanding, like Mr John Varley analytical view on this crisis (for example published on this blog) the figures in this table should look as expected.

It is likely that curbing City pay would give it a competitive advantage because now top pay in the City appears to attract top talent, but of the wrong sort.

Well, yes Ma'am, but has it not been glaringly obvious for the last three years? It is not particularly optimistic if it takes over three years for the top world officials to grasp something which is that obvious.

Having recognised the scale of the crisis Ms Lagarde said that Europe should boost bailout fund and consider euro bonds. The net effect of such actions would be to spread the crisis onto thus far healthy economies. She added:

"I am convinced that we must step up the Fund's lending capacity."

In a nutshell Ms Lagarde recommended solving the current crisis with even more debt and more countries dragged into it. It is not a particularly bright idea. As explained three years ago in "The largest heist in history" the only effect would be prolonging the crisis and making it bigger.

If her recommendations are implemented, some time later we will be back into square one but with a much bigger problem. This is the approach to solving the current financial crisis for nearly 5 years (since Northern Rock collapse). And it led from bad to worse to even worse. Some with experience in the financial sector regard people dealing with the current crisis as "outrightly stupid" but one really has to pose a question about their sanity (in the most basic meaning of this word). Albert Einstein's famous remark: "Insanity: doing the same thing over and over again and expecting different results" describes their behaviour very accurately.

Saturday, 21 January 2012

The issues raised were profound: capitalism as a free market system with seemingly no alternative, "responsible" v "irresponsible capitalism" and so on. It was very insightful.

However all these issues were discussed in the context of the ongoing financial and economic crisis. It was presented as if the current financial mess was a result of a failed system, the current version of capitalism. The truth is much simpler. Indeed it is very basic.

To put this into a small business perspective: it would be the same as discovering a shop where all the money is being stolen from the till by thieving employees and discussing the management practises of a shop owner (the taxpayers for the banking system) or the greedy irresponsibility and the unethical behaviour of the thieving staff (the bankers). Such discussion is obviously important but in the case of our hypothetical situation the shop workers would have been prosecuted for theft. In the real, much more grave situation currently facing us, no-one has seen fit to prosecute the thieving shop workers. The dishonest behaviour continues, under the watching gaze of the powers that be and the public at large, with no-one seemingly aware that any kind of crime is being committed. If the justice system is to mean anything it cannot be more lenient to financiers than it is to ordinary shop assistants.

A discussion about capitalism v socialism, or "responsible capitalism" v "irresponsible capitalism" is generally important. Society will always be looking for an equilibrium that will give it prosperity. However with the BBC Newsnight broadcast, it was the context and timing that mattered. And in this context the discussion was not only vacuous but it was actually a smokescreen. It created an impression that the fraudulent criminal activities (in the technical and legal sense of these words) of the financial industry were not what they were but somehow a result of some systemic failure. The behaviour was maybe irresponsible, maybe immoral, maybe a result of greed, but not a crime. And here is the key to BBC propaganda: you can despise people for being greedy, unethical or irresponsible. They may even be considered as repulsive. But you cannot bring them to justice.

Therefore one cannot consider the programme as simple hogwash. It was in fact, very soft propaganda (therefore quite likely to be effective) which will help, the financial criminals who caused such damage to the economy and brought massive misery to millions, to escape justice. And the BBC seems to be doing a good job of doing this, evading a discussion of the most important historical event that is happening in front of our eyes, i.e. the liberal western democracy, as we know it, is on the ropes.

Saturday, 14 January 2012

Yesterday, on the same day as the French AAA credit rating and the ratings of many other European countries were downgraded, the Costa Concordia cruise ship nearly sunk off the coast of Italy. According to a BBC report:

The British financial industry would have collapsed back in 2008, had it not been rescued by the taxpayers. Had it happened it would have brought down the entire British economy. It may still do so and The Economist seems to be determined to facilitate this process.

The Economist's circulation is some 1.5 million globally and around 200,000 in the UK alone. How are such articles read in countries like China, India or Brazil? The Germans, Brazilians, Argentinians, Italians, the Dutch must have the same smirk of disbelief when they hear comments that England has the best football team in the world. But to be fair to the English football fans, for some years this has been said with a pinch of cynical self-indulgence and more like a distant dream. Britain is very good in finance? Is The Economist really serious? It sounds like a serious death-wish: British economy was nearly killed altogether by the financial industry.

Interestingly, but unsurprisingly, whilst presenting the value of the City to the British economy, The Economist leader does not even account for trillions of pounds (in hundreds or more) the City has received and is still receiving in explicit and implicit subsidies from the taxpayer. For example an implicit insurance against collapse resulting from "too big to fail" phenomenon. One may wonder whether anybody in The Economist can actually understand this, let alone have an expertise to calculate its value competently in the actuarial terms. It is not that difficult after all.

It may all sound a bit unsporting but after all, hey, we have democracy and free press, don't we?

Friday, 23 December 2011

Italy has to roll over 306.9 billion in Eurobonds in 2012. The interest rate it has to pay is around 7% and is highly unlikely to be any lower. There were concerns that Italy would not be able to refinance its debt on the markets. The European Central Bank (ECB) was not willing to step in directly but it had a trick up its sleeve and decided instead to lend nearly 500 billion Euros on 1% annual interest to the private banks on 3-year loans. The banks will buy Italian bonds and will cash a massive interest rate differential (4%, 5%, 6%). This differential would have only made sense if lending to private banks were significantly less risky than lending directly to Italy by buying its bonds. But this is not the case: if Italy defaults on over 300 billion Eurobonds, the private banks will also default on their debt to the ECB and quite likely will collapse altogether. It is that simple. And who is backstopping the ECB if this catastrophe happens? The European taxpayers of course.

This is ridiculous. This is the way the financial industry gets subsidies from the taxpayers. This is yet another example of the mechanisms of "the largest heist in history", and it is one of the most primitive kind. There is no sophistication whatsoever here: this is daylight robbery carried out with brute force. By comparison Albanian pyramids of 1996 - 1997 look incredibly sophisticated and innovative financial operations. Capitalism is dead: long live communism for the rich.

The really alarming news is that it is not sustainable. A process of pure money printing cannot sustain the financial industry and the economy: Britain tried it in the 1970's, but to a much smaller extent, with heavy industries and failed miserably. In the same way as the subprime crisis brought the financial system down (only to be rescued by the taxpayers' subsidies), this kind of massive cash printing will bring European economies down. This is how this financial gangrene spreads. The later it happens, the more spectacular it will be.

From a free market, capitalist, laissez-faire perspective the state of the economy and the roots of the current financial crisis look far worse than Occupy London activists think. They criticise basic premises of capitalism: profit making, fractional reserve banking, fiat currency. But the fact is that the current economy and the financial system has nothing to do with them any longer. Capitalism as we had known it till the end of 20th century was turned into a global fraud enterprise, illegal under the existing laws. As recent events in Greece and Italy showed it is now threatening the very foundations of liberal democracies.

Doing a ponzi

In the 10 years leading to the collapse of 2008, the financial system abandoned the fiat currency and fractional reserve banking. This was the system were the money, as the store of value, was underwritten by individual countries and multiplied in a controlled way from currency to broad money. Instead, the financiers and bankers started practicing a depleting reserve banking technique: a mechanism that replaces the currency, i.e. fiat money and legal tenders in the banks' reserves (in terms of their ratio) by papers generated by the banks themselves.

The typical loan-deposit ratio had always been below 100%, for every £1 deposited, the amount lent must be less than £1. With each cycle of lending and deposit the amount “created” tends to zero: the overall impact on the money supply is finite and measurable. And yet, in 2007 UK banks loan-deposit ratio was 137%. In other words the banks were lending out on average £137.00 for every £100 paid in as a deposit. This thereby increased the broad money to currency ratio with an exponential, run away pace; creation didn’t tend to zero, but to infinity [for a fuller account of this process please see The Largest Heist in History]. Because of the latter this mechanism is a classic example of a ponzi scheme, illegal under current laws and prohibited by regulations in all developed countries [for more analysis please refer to the publications listed below this article].

Who did it?

For the last couple of years there has been a fiction creeping into the mainstream media - e.g. BBC, FT, The Economist - that somehow it was the democratically elected politicians who were really responsible for the current crisis. It is a plausible proposition but only in a sense that the politicians allowed the fraudulent and illegal practices to be developed and conducted by the financial industry. But the problem is somewhat deeper.

Before the banking collapse of 2008 governments borrowed a lot of money. But neither Greece's nor Italy's nor the UK's national budgets were deemed as unsustainable. In fact the private banks were all happy to lend to governments in the US, the UK and the entire Eurozone at very good rates. It was only after the financial collapse that started in autumn 2008, when the governments borrowed heavily to rescue the banks from a complete meltdown, that the governments' debts have become an issue to the financial markets. In a nutshell, the governments that saved the banks and financial markets from a meltdown by borrowing huge amounts of monies are now being attacked for having too much debt by the institutions they saved.

In the background there is an issue of links between the financial and political worlds. In the UK everyone knows that there are revolving doors between the Westminster and the City. It is considered normal that successful politicians become top bankers and that top bankers turn into politics. Top bankers also play a key role advising politicians in their fiscal decisions and on the regulatory policy towards the financial industry. Names like Tony Blair, David Laws, Sir James Crosby, Sebastian Grigg come immediately to mind. Until recently all monies lent to governments were willingly lent by the financial markets. All governments' borrowing decisions and decisions on the financial regulation were taken by financiers or on advice of financial experts. In this sense: politicians and financiers are the same people.

There is only one key divide: the private sector pays much more than government, indicating where the loyalties truly lie. Therefore even if one accepts that the politicians borrowed too much money to fund their budgets it was at the advice of the financiers regardless. No one can possibly imagine a layman politician taking a decision to borrow tens of billions of dollars, pound or euros without taking professional advice from a financier, effectively an approval. Even the UK government was advised on the meltdown of the financial system by private financiers: BlackRock, Citi and Credit Suisse. There was no limit to the systemic conflicts of interest.

Doing a Scargill

The financial system, which still operates - from technical and legal perspective - as a ponzi scheme is at its limit. To keep it going it needs additional amounts of liquidity which can only come from the taxpayers. But taxpayers are not prepared to suffer ever more austerity measures in order to subsidise the banking and finance industry. To advance their interest the financial markets started changing democratically elected governments, in Greece and Italy, replacing the prime ministers with... bankers. Modern democracy in Europe is effectively being dismantled.

This situation is in many ways very similar to the collapse of the heavy industries in Britain in the 1970's. The management and trade union barons were demanding ordinary middle class taxpayers keep subsiding heavy industries as somehow indispensable. Now the financial industry is doing the same: their leaders terrorise the UK government in the same way as Arthur Scargill back in the 1970's and 1980's. The only difference is that Scargill and the trade unionists were fighting for jobs and livelihood of workers in a bona fide industry. The financial industry captains are fighting for multimillion pound remuneration in an enterprise which degenerated - from a technical perspective - into a global criminal enterprise. The British heavy industry of the 1970's became inefficient and unsustainable and had to collapse. The current financial industry, having been turned into a classic ponzi scheme - is also unsustainable and will collapse. The longer the governments support it, the more spectacular the eventual collapse will be.

The financial nomenklatura

The Occupy London protesters should focus on demanding the prosecution of the financiers under the existing laws, as fraud was committed by thousands on a global scale. Instead they are more concerned with old style left-right debate: capitalism as evil and socialism as salvation. This is irrelevant. Capitalism exists no more. It was replaced by a giant fraud enterprise akin to the old communism system. Communism for the rich that is.

In the Soviet style communism, which collapsed in 1989, the ruling class, nomenklatura, did not own capital. These apparatchiks were purely beneficiaries of running the countries. They had no long term interest in managing the countries wealth properly but in deriving short term benefits for themselves. Profits belonged to the few and losses were suffered by many. The capital was owned by the entire societies, and the entire societies suffered the consequences of the mismanagement and thieving of nomenklatura.

Very similarly now, to a great extent, the bankers and financiers do not own banks and financial institutions. They are owned by pension funds, saving policies and endowment policy holders, and even by governments and taxpayers. Effectively, the tax-paying middle class who saves and invests owns the financial industry which is in turn under the management of the bankers and financiers, the nomenklatura of the 21st century. And, like in the Soviet style communism system, these financial apparatchiks are not accountable to anybody but only interested in short term gains and squeezing as much as possible from anyone who has any money and cannot escape: by and large middle class taxpayers.

Heading for a meltdown

In the 1980's some reformers tried to make communism work better. They failed abysmally as they could not change the pathological habits and practices that had been instilled. No doubt there are reformers now, like Dr Vince Cable, who try to reform the current version of communism (for the rich). But the reformers have little joy. It looks clear that the financial system, like the old communism before it, is heading for a meltdown.

Whether this meltdown will take the shape of the Czechoslovakian "velvet" revolution of 1989 or, as in Romania, a far uglier version, only time will tell. Both are still optimistic scenarios nevertheless. The financial crisis that had started with the Wall Street collapse in 1929 ended up ten years later with the World War Two. It is impossible to tell whether history will repeat itself. But considering carefully the scale of the current financial crisis and the way it is managed by the world leaders, there is no particular reason to feel overly optimistic.

"You have managed to pick a very simple theory out of a very complicated situation and explain it very simply (to me anyway). This is very diffcult thing to do and a worthy achievement." - [a reader's comment]